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Mexican Oil And Gas: Christmas Arrives Early

On the morning of December 12th, Mexico woke up to the sound of fireworks as the country celebrated the festival of the Virgin of Guadalupe. A national holiday, the 12th marks the beginning of the Christmas festivities in Mexico, which will end on the 6th of January with the Dia de los Reyes (Three kings day or Epiphany). But for many in the energy industry, the fireworks and celebrations had a double meaning. The day before, the Mexican Senate and Chamber of Deputies approved a legislative initiative that reforms the country’s energy sector. As expected, the law includes measures to open the oil and gas industry to private and foreign investment, through cash, profit-sharing and production contracts. What is new, however, and is the result of the hard political bargaining that has taken place between the governing PRI and the PAN in recent weeks, is the legal entity of the “license”. Although the legislation still explicitly prohibits the use of concessions in the hydrocarbons sector, the license will act in a very similar way, with the idea that it will be applied to unconventional projects (primarily shale). This item made its way into the legislation thanks to the PAN insisting that the government adopt a more liberal approach to oil reform to secure PAN support in the aftermath of the deeply divisive fiscal reform process.

But this raises a rather serious problem. If a license is in fact almost identical to a concession, we should expect that there will be legal challenges to the contracts, arguing that they are equivalent to concessions and therefore explicitly prohibited. This creates a certain degree of legal uncertainty, something that the private sector will worry about, and which will act as a deterrent to investment.

As expected, the left-wing PRD party, abandoned the energy reform negotiations and the Pacto por Mexico (the highly effective bargaining mechanism between the three major parties), leaving the PRI and PAN to work out their differences. Protesters have formed a barrier around the Senate to keep legislators from getting to work, in fact Senators and their staff have been camped in the Senate building for the past week, leaving only briefly to get supplies. Though the wall that they built is quite impressive, the protest itself is rather sparsely populated, reflecting the mood of acceptance or resignation that prevails in the capital with regards to the energy reform.

At the last minute on Monday, it seemed as though the PRD might manage to delay the process by taking control of the Senate and preventing voting from taking place. Though PRD Senators held the chamber for four hours, it was a symbolic measure taken to placate the protesters outside rather than a serious attempt to derail the legislation. When they retreated, the Senate commissions voted and approved the bill, allowing it to be approved by the plenary session on Wednesday despite another vociferous protest by the left.

Before this happened, however, a further twist in the tail emerged. The PAN and the PRI agreed to a clause in the reform that removes the Pemex union, the STPRM, from the board of the company, drastically reducing organized labor’s control over the company. Ironically, this idea had been part of the PRD’s reform proposal, but made its way into the final bill via the PAN. The union has traditionally been seen as a strong ally of the PRI, and it is thought that its removal from the board reduces the PRI’s long-term influence over Pemex.

The legislation then passed to the Chamber of Deputies, in which a rapid vote took place, approving the law in the general form it was sent by the Senate. Minor negotiations still need to take place to approve the details of the law, but the final version will be completed by the end of this week. The speed of the legislative process was extraordinary, once a deal had been agreed between the PAN and the PRI.

Much still needs to be decided, in the way of secondary laws, implementation and institutional strengthening (in Pemex and the regulatory organisms), and the first half of next year will be dedicated to that. Nonetheless, it seems that 2014 will begin with the three kings bringing a gift for the energy industry in the form of a radically different oil and gas sector in Mexico, one that is ripe with opportunity.

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